Monday, April 28, 2008

The Tax Rebate Check: We Already Spent It

U.S. taxpayers will be receiving tax rebate payments of up to $1,800 starting today. The rebates are supposed to revive the faltering U.S. economy, but consumers are not going wild with their plans to spend the money.

Suze Orman explains why going on a shopping spree with this kind of unexpected money doesn’t make sense, even though that’s the idea behind the economic stimulus payments:

Stash It, Don’t Cash It

In case you feel you have a patriotic duty to splurge with your stimulus check, the way some politicians are urging (Bernanke, for one), let me reassure you that paying off debts goes even farther to stabilize the economy and shake off the problems that are causing the current recession. In case anyone needs to be reminded, the recession grew out of a financial crisis caused primarily by U.S. consumers owing too much money.

For about a quarter of a million families, the stimulus payments will make the difference in their mortgage payments that allows them to avoid foreclosure. If you use your stimulus check to pay your mortgage, you are not alone, and the benefit to the national economy if the bank doesn’t have to kick you out on the street is substantial. (All the more so now that home vacancies are at the highest levels ever recorded.)

Regardless of your level of debt, if you have any debt at all, it makes sense to pay your debts. This includes credit cards, car loans, home mortgages, and any other arrangement in which you need to pay money to someone over a period of time. If you have a student loan, you might make the biggest difference for the economy by paying it back a little early. The way things are looking now, a million students may not be able to attend college this fall because of the way the ongoing breakdown of financial institutions is affecting student loan funding. Depending on who you owe your student loan to, the money you repay now might be used to make new loans to current college students later this year.

Most Americans have moderate to high levels of debt. For example, as I wrote recently, the average U.S. house is less than 50 percent paid for. So the question of what to do with a little “extra” money is misleading. The money has already been spent.

Most consumers with no debt are either poor or rich — too poor to get a credit card or car loan, or too rich to need one. Economists believe low-income consumers will spend most of their rebates within a matter of weeks, although as President Bush suggested today, this may not be any new spending, but only enough to “help . . . offset the high prices we’re seeing at the gas pump and the grocery store.” Wealthier consumers are not really expected to notice the rebate payments, so economists don’t expect any extra spending from them.

I’ve seen a series of surveys conducted by trade groups hoping to find that consumers will spend the money on vacations, electronics, cars, and so on. The results are, from the sellers’ point of view, disappointing. According to the surveys, consumers were planning to spend between 10 and 25 percent of the rebate money on new big-ticket items and discretionary purchases, but these surveys were taken before the recent jump up in petroleum and food prices. The actual level of new spending, after consumers fill up their fuel tanks, might be around 5 percent, or $6 billion.

This is what happens when stimulus payments arrive at the same time as an energy price shock (record high oil prices again today) and the lowest levels of consumer confidence in 26 years (measured by the Reuters/University of Michigan consumer sentiment survey). Consumers who are skeptical about the economy can’t be expected to go out and spend freely, but at least the extra money will help them shrug off some of the more gloomy scenarios that might be worrying them. And maybe that’s the kind of economic stimulus we should expect from the current round of stimulus payments.

Thursday, April 24, 2008

Food Rationing Hits U.S.

Food rationing has come to the United States. It is only happening in a few hundred stores, and only for three or four varieties of rice, but the news still reinforces the idea that we are in a strange new world.

Tuesday, April 22, 2008

A Hint of Hyperinflation

Another day, another record high oil price.

Crude oil prices have hit significant new records every day for the last seven trading days. Gasoline prices, already at record levels, went up 4 percent over the weekend, and diesel prices are thirty percent higher than gasoline. You could start to get the impression that petroleum prices go up every day.

This is what hyperinflation looks like. But this is just a “price shock,” a quick jump up in the price of one product or category. In hyperinflation, price increases would continue for week after week and affect more products than not.

Crude oil prices go up, but they also go down, and one day soon the prices will be lower than the day before. The price of gasoline will approach $5 a gallon during this summer’s peak period of demand, but then it will fall again. And so you don’t want to look at the change in oil prices this month and call it a trend. To see the trend, you have to average the ups and downs together.

Sunday, April 20, 2008

Obama Comes to Town

I had the good fortune of being able to walk to a presidential campaign rally yesterday when Barack Obama stopped at the train station for a half-hour speech. Around 3,000 people attended. An Associated Press reporter filed a story from the event. It was the biggest thing to happen in Downingtown since I moved here.

When you can see something directly and not have it filtered through the news media, you get a very different view of it. The news media adds story lines and follows conflicts that don’t necessarily really exist. They focus on dramatic moments and suspense. They do this with everything they cover. I suppose they have to — it’s the only way to turn the news into a high-energy, entertaining experience.

But what gets lost in the story, conflict, drama, and suspense is the work. Most of what you hear about is most fundamentally about a lot of work to be done by a lot of people. If you read it in the news, it can seem that problems are solved by arguing, waiting, and winning (or losing). But really, problems are solved by work.

When Obama says he wants people to believe in America’s ability to solve problems and improve, he is really trying to get more people interested in the problems — interested enough that they might do some of the work that needs to be done and create part of the solution.

Ultimately, solving problems has more to do with work than with controversy, and this is a point that came across in Obama’s speech that you wouldn’t get by reading the political headlines at the end of the day.

Monday, April 14, 2008

Food Prices Hit the News

Perhaps I spoke two days too soon when I suggested that the news media ought to start paying attention to food prices and shortages. The story seems to have broken through. Take a look at these headlines, for example, each one a top story somewhere today:

Food costs rising fastest in 17 years

Riots, instability spread as food prices skyrocket

High Food Prices Spur Violence, Hunger Fears; World Bank President Asks Nations for $500M for the U.N. Food Program

Events of the weekend — the attention of the World Bank, the International Monetary Fund, and the Secretary-General of the United Nations and the ouster of the Prime Minister of Haiti — may have helped persuade reporters and editors that food had become news.

Saturday, April 12, 2008

Corn Shortage Spreads to Rice, Wheat

A year ago, there were riots in Mexico City to protest the high price of corn. I was surprised then to learn that Mexico, historically a major corn-producing country, now imports most of its corn from the United States, where the corn ethanol initiative had led to a shortage of corn. This year the corn riots have moved to Haiti, and the United States may be producing a third less corn. According to the USDA, U.S. farmers are planting 30 percent fewer acres of corn so they can grow crops that they expect to be in even higher demand, particularly soybeans. At the same time, the grain shortage is affecting the other major grains of the world, rice and wheat.

The world’s total production of rice and wheat have fallen only modestly. Rice production is apparently about 4 percent below the peak levels of two years ago, and wheat crops are also close to their historic peaks. Yet with the demand for grains growing year over year, even this slight decline has led already to spot shortages in which poor people around the world are forced to wait for a week or two with little or nothing to eat.

Fearing disaster in their own cities, India, Egypt, and other large rice-producing countries have suspended rice exports. Bangladesh, still reeling from recent floods, has nothing to export this year, and Pakistan is seeing all of its surplus disappear over the border into Afghanistan, a country again reeling from food shortages resulting from the Taliban Army’s religious opposition to agriculture. Before this is all over, the price of rice is likely to be double what it was a year ago — and there are reasons to think the price will never go back down.

Wheat would be the obvious substitute for rice, but wheat too is under pressure. Russia has suspended wheat exports to ensure that Russians will have bread, and it is thought that Kazakhstan, normally a wheat exporter, may not have any wheat to sell either.

Many are blaming biofuel initiatives for the sudden shortage of grains, and given the current crisis, it probably would be a good idea for the United States and other countries to stop all subsidies for diverting crops to fuel production. However, that will do only a little to address the crisis. There are larger forces affecting the demand for grain and seemingly intractable problems that may affect the supply for years to come.

A bigger issue than the biofuel craze is the growing popularity of meat as a food. It takes about 10 kilograms of grain to produce one kilogram of meat, and with a rapidly growing middle class in China and other countries, more and more grain is being used to feed animals. There are more livestock than people in the world, so even a small shift of food toward animals leaves noticeably less for people.

There are also serious problems affecting the supply of food. As always, there are the political problems. In troubled countries like Afghanistan and Somalia, the threat of violence may literally prevent farmers from growing food crops. But as serious as these problems are locally, they are minor compared to the trends affecting food production worldwide. Most ominously, the world is running out of water. About an eighth of the cities in the world depend on fossil water — underground and glacial water supplies that will be largely depleted in the next 40 years. Already, the declines in water are leading to what appear to be permanent declines in food production across east Africa and central Asia.

The water problem could be solved if we had enough energy to take the salt out of sea water. Yet energy prices are already squeezing food production. Oil prices that have doubled since the U.S. invasion of Iraq are going up again. It takes enormous amounts of energy to harvest, process, and transport most food, and at this point, farmers depend on petroleum fuels to operate their equipment. With higher oil prices, farmers have no choice but to charge more for the food they grow.

The World Food Programme warned last fall of the troubles high energy prices were causing in its mission to deliver food to the poorest areas of the world. Now high food prices and spot shortages threaten to spread the hunger problem to a billion people who in normal times would be able to buy food. So far, the main thing we have seen of the problem in the U.S. news media is the price increase at Starbucks; the protests, strikes, and riots in cities around the world mostly have not been reported. But if the United States delivers one third less corn to the world market five months from now, the current unrest could turn to disaster. We can face this looming disaster more effectively if we start now than if we wait until it is forced upon us.

Tuesday, April 8, 2008

Introducing Fear of Nothing

I have written a new book, Fear of Nothing, which takes a look at the economic and spiritual issues behind clutter and a busy schedule. To tell people about my book, and to give people a chance to respond with their comments and experiences on the subject, I’ve created the Fear of Nothing blog. You might be surprised to discover the true costs of clutter and a busy schedule. It’s more than just an inconvenience, and just being more organized is not the solution.

Saturday, April 5, 2008

Interest Rate Cuts Stall Consumer Spending

Lower interest rates are supposed to stimulate the economy by boosting borrowing and spending. But this effect is not nearly as automatic as the business headlines would have you believe, and in the current recession, the most recent interest rate cuts seem to be having the opposite effect.

First let’s look at the ways interest rates can affect spending. With lower interest rates, it’s easier to borrow money. You need a car to get to your new job? If auto loan interest rates have declined from 8 percent to 7 percent, your monthly auto payment just fell by about 5 dollars, making it that much easier for you to buy the car. And on the other side of things, if you have lower interest rates on your credit cards, you might not be in such a hurry to pay off the balances. These two effects, on individuals and businesses, are supposed to lead to higher spending.

But at the same time, if you have money in the bank, lower interest rates mean you have less income. And this is a special concern for the millions of people who are planning to retire in the next 25 years. With lower interest rates, you may have to save twice as much money this year to keep up with your retirement savings plan. You can’t afford to spend the money now — you need to save it for later.

At the same time, lower interest rates tend to reduce the value of the currency. With low interest rates on U.S. dollars, investors are less interested in investing in U.S. dollars, and the value of the dollar declines — as it has already been doing in alarming fashion this winter and spring. And this means it costs more to buy manufactured products made in foreign countries. According to economic theory, this should lead you to buy more U.S.-made manufactured goods. But I know what you’re thinking: “What U.S.-made manufactured goods?” And low interest rates add to inflation and tend to drive up prices in general. Consumers are more likely to just buy less when they see the higher price tags.

Right now, it is very clear that the lower interest rates are not encouraging consumers to borrow. On the contrary, consumers seem more eager than ever to pay off debts. Consumers are not only skeptical about their ability to borrow in the future, they are not particularly confident that they can keep the loans they already have. Where three years ago the attitude might have been, “If something goes wrong, we’ll just refinance,” now people are saying, “What if we can never get another loan?”

This kind of consumer psychology is not so easy to overcome. An interest rate cut will not necessarily have consumer borrowers breathing a sigh of relief. Instead, that sigh of relief may come only when the loans are paid off.

For business borrowers, lower interest rates are speeding up a wave of consolidation and buyouts, leading to more layoffs. Perhaps it’s good for businesses that they can cut jobs this year instead of next, but it does not seem to be leading to economic growth.

There are times when lower interest rates are all the encouragement people need to invest in something new that helps the economy grow. This does not seem to be one of those times. The impact of interest rates on retirement savings is especially profound right now with more than half of all U.S. adult workers hoping to retire in the next 25 years. For these workers, lower interest rates and higher prices mean they have to spend less and save more, and that is not a recipe for economic expansion. In other times, lower interest rates have helped speed up an economic recovery. On this occasion, though, any further interest rate cuts will probably do more harm than good. We will have to find other ways to put the economy back together.